Viking Office Products, Inc. History

Public CompanyIncorporated:1960 Employees: 1,067 Sales: $449.7 million Stock Exchanges: New York San Francisco SICs: 5961 Catalog and Mail-Order Houses

Company History:

Viking Office Products, Inc., is a leading mail order seller of office supplies to small- and medium-sized businesses. The company relies on sophisticated computerized mailing systems to send customized catalogs to its potential buyers, and then provides them with a high level of customer service in order to keep their business. Founded as a small California stationery store, Viking began to expand dramatically in the mid-1980s and has attained high levels of revenue and income growth ever since.

Viking got its start in 1960 as a small office supply retailer located in Los Angeles, California. The store was opened on January 7, 1960, by Rolf Ostern, who hired an assistant to round out his two-man staff. From the beginning, Ostern supplemented his retail operations with a small catalog, but it was not until five years after going into business that he mailed his first catalog featuring the store's full line to his customers. In 1969 Ostern changed the name of his store to Viking Office Supplies and moved to a new location. At this time, the company also purchased its first computer, to keep track of its growing operations.

By the mid-1970s, Viking had established itself as a West Coast mail-order retailer of discount office supplies to small and medium-sized businesses. At that time, the company began a geographic expansion. In August, 1976, a division of Viking opened in Dallas, Texas, and began shipping orders. Three years later a third location was added when operations commenced in Cincinnati, Ohio.

In 1983 Viking hired Irwin Helford as president of the company. Under his direction, Viking's revenues began to expand at a dramatic rate, as he introduced new marketing and merchandising techniques. Helford stressed customer service as a way to set Viking apart from its competitors in the office supplies market. Customers received courteous service while ordering on the phone, and then their supplies were delivered to them as soon as possible, often in just one day. In addition, the company embarked on an aggressive program to increase its customer base. In 1985 Viking mailed 15.4 million catalogs, the vast majority of them to potential customers who had never ordered from the company.

At the end of 1985 Viking reported revenues of $42.5 million, derived from sales to 215,000 active customers. These sales more than tripled the company's previous year's sales, which totaled $15 million. Viking's sales figures continued to rise in the next year, as an additional 42,000 businesses phoned in orders, and revenues increased to $57.5 million.

In 1987 Viking opened a fourth distribution center to better serve another segment of the country. The company's East Windsor, Connecticut, facility was designed to fulfill orders coming from the East Coast states. With the addition of this new facility, Viking's revenues rose to $81 million in 1987, as its customer base climbed to 335,000. Viking's growth mimicked the growth of the office supplies industry overall in the 1980s, as the market for these products expanded steadily.

With its record of strong growth throughout the mid-1980s, Viking's original owner, Ostern, and his financial partners decided to cash in their ownership in the company. Accordingly, on September 1, 1988, Viking was sold by its founders in a leveraged buyout to the VOP Acquisition Corporation. This company had been founded by Viking's management and the New York investment banking house of Dillon Read & Company, along with some of their affiliates, for the express purpose of purchasing Viking. At that time, Helford became chairman of the company's board of directors.

In the year that Viking changed hands, the company's revenues continued to grow. Sales topped the $100 million mark for the first time, reaching $105.1 million, and 364,000 customers ordered from the 28 million catalogs that the company mailed. In October, 1988, Viking introduced a new line of merchandise, office furniture, with its own separate catalog and program.

In the following year Viking opened its fifth operations center, a facility in Jacksonville, Florida, strengthening the company's East Coast operations. In October, 1989, the company also introduced its second new catalog operation, rolling out a line of computer supplies targeted to the needs of small- and medium-sized businesses. By the end of the year, these products were accounting for eight percent of the company's overall sales.

In the course of 1989, Viking's owners put in motion the steps to sell stock in the company for the first time. At the start of December, 1989, VOP was merged into its subsidiary, Viking Office Products, in preparation for the company's initial public offering of stock. On March, 14, 1990, Viking offered stock to the public on the NASDAQ stock exchange, selling 2,300,000 shares at a price of $10.50 per share to raise $25 million. Much of this money was used to repay debts incurred in the 1988 buyout of the company. With this move, Viking was able to significantly lower its interest payments.

Three months after the stock sale, in June, 1990, Viking once again reported record annual revenues, posting $157 million in sales over the previous twelve months. These sales came despite fierce competition in the office supplies industry. The emergence of low-priced office supply warehouses, or superstores, and the disappearance of the traditional stationery dealer, meant that price competition in the industry had grown extremely strong. Viking's market research indicated that approximately one quarter of the company's customers were located in areas where superstores also did business, and the company instituted elaborate monitoring procedures to determine the effect of this competition on its business.

With prices kept low by this competition, and a general recession that caused businesses to cut back on expenditures, Viking faced a real threat to its profits. In an effort to maintain its competitive edge, the company stepped up its customer service activities, vowing to provide "fanatical" attention to those who bought from its catalogs, while controlling its own costs and overhead.

As part of its campaign to contain costs, Viking defeated a local Teamsters union attempt to unionize its Los Angeles work force in late 1990 and early 1991. The company also ended its financial obligations associated with its buyout in April, 1991, when it fulfilled the terms of an agreement with Glenfed Capital. This helped to keep costs associated with financing down.

In the spring of 1991 Viking experimented with a program of personalized, private discounts for its customers. Using its database of previous purchases, the company sent clients catalogs that featured reduced prices on certain key items. This program was made possible by new ink jet printers and publishing technology. In its early trials, it proved successful in enhancing sales. Viking also sought out new, less competitive markets. Its product line extensions in the furniture and computer supplies fields grew to contribute almost a quarter of the company's sales in 1990. In addition, Viking turned its attention to foreign shores.

The company made its first move overseas in September, 1990. At that time, Viking established a United Kingdom subsidiary, Viking Direct Limited, and opened a facility in Leicester, England. In making this move, Viking hoped to gain a toe-hold in the European Economic Community before the planned unification of that market. Viking rolled out its first European facility without resorting to acquisition, partners, or consultants, and the startup costs for this venture were high. Part of these costs were related to lawsuits filed by the company in order to win exclusive rights to the use of the "Viking Direct" name. By June, 1991, Viking Direct had racked up sales of $41 million, a promising start, and the operation had become profitable on a day-to-day level, although it was far from recouping its initial costs. Nevertheless, in a brief time, Viking Direct had become the largest mail order marketer of office supplies in the United Kingdom.

Domestic sales at this time reached $226.3 million, an increase of 43 percent over the previous year. Viking attributed its ability to win new customers and keep old ones during this time in part to its sophisticated database management. This database was contained on eight IBM AS/400 computers, which used specialized software to keep track of every sale the company had made since 1984. In addition, Viking monitored how much it cost to attract each customer, what items the customer typically ordered, and the total amount of that customer's business, and also cross-referenced these statistics by mailing, region, and size and type of business. With this information, Viking phone operators were able to increase the size of a customer's order by suggesting items that the client had ordered in the past.

Viking also discovered that it could retain customers even if its prices were not the rock-bottom lowest in the market. "We've found we don't have to be the lowest every time on every item the way the superstores are," Helford told Catalog Age in August, 1991. This factor allowed Viking to protect its bottom line without losing customers. In addition, in early 1992, Viking stepped up its efforts to use catalog mailings most efficiently. The company installed computer programs that allowed it to mail more catalogs to customers who were more likely to respond favorably, and to make sure that no two catalogs mailed to a customer were ever the same. With 50 different version of each catalog that it printed, the company was able to select the best format or product mix for each client.

In January, 1992, Viking's stock split two-for-one as a result of the company's rapid growth and its strong performance in the stock market. To fuel future growth, Viking opened its sixth distribution center in Seattle, Washington, early in 1992. This facility was designed to provide overnight delivery to customers in the Pacific Northwest. On June 1, 1992, Viking expanded its geographical reach further when it began operations in France. The company set up a subsidiary based in Paris to enter the highly competitive French office supplies market. Within one month of its inauguration, this operation had reported more than $1 million in sales, and it had lined up 5,000 French businesses as customers.

At the end of June, 1992, Viking reported year-long revenues overall of $320 million, an increase of more than 41 percent from the previous year. These sales yielded income of $12.8 million. Viking had shown strong growth in active customers, increasing its list of buyers more than 30 percent, to 700,000. A significant portion of the company's growth came in the relatively immature British market, where sales more than doubled to $100 million. Another source of Viking's steady growth was its state-of-the-art database and catalog customizing technology. The company sought to offer the broadest possible array of products, and to tempt customers with catalogs as often as possible. At the start of each year, Viking mailed its "big book," known as the Spring Buyer's Guide.

Outside of the annual buyer's guide, however, Viking believed that the future of mail order operations depended not on mass mailings directed at a general population, but on customized offers made to individual customers. In creating its other mailings, Viking strove at all times to take notice of the different needs of its clients, and to provide them with targeted offers of the products they had ordered in the past. Although this tactic proved successful overall, it backfired in one instance when Viking Direct sent a British company a catalog with a notice on the front calling attention to the large quantities of toilet paper the company used.

Viking also personalized mailings with a message on the cover directed to its customer by name, mentioning the company's line of work, or previous purchases the customer had made. "We get far better response rates by tailoring the message to the customer," Helford told Fortune magazine. In one special case, Viking used its computerized database to cull the names of customers located in southern Florida after the area was devastated by Hurricane Andrew in the summer of 1992. The company sent these customers a special catalog that included a $100 gift certificate. This effort resulted in a 52 percent response rate, along with letters of gratitude and pledges of long-term business.

As part of its overall effort to segment its business, Viking also introduced a number of new, focus catalogs, which offered a separate line of merchandise. In addition to its older furniture and computer supply programs, the company added office machines, a wide variety of papers, and custom printed stationery. "We're constantly asking ourselves, 'what are our customers buying from our competitors that we could be offering ourselves?"' Viking's director of marketing explained to Catalog Age in August, 1992. "The specialty catalogs are a way to get more than existing customers." The new items also offered less price competition and higher margins than Viking's staple products, which still accounted for 85 percent of the merchandise it sold.

By August, 1992, Viking's efforts toward high-level customer service had improved the company's fulfillment time for its office supply orders. In 1989, 70 percent of all company orders had gone out the same day they were received. By the summer of 1992, that number had increased to 98 percent. This overnight service was free for orders above $25. In addition, Viking offered toll-free ordering and an iron-clad one year guarantee on all its goods, which even extended to its stationery printing operations. The company had an extremely liberal return policy. For instance, Viking offered to replace orders of printed goods if they were inaccurate, even if the error was the customer's fault.

Driven by these policies, Viking's growth remained strong in the first months of 1993, although the company experienced some adverse effects from it foreign operations. A devalued British pound depressed earnings from its United Kingdom operations, and the company wrote off a $6.3 million loss on its subsidiary in France. As the French Viking operations gained customers, however, its losses steadily slowed.

By the end of June, 1993, Viking's annual revenues had increased $449.7 million, a gain of more than 40 percent from the year before. A significant portion of this increase came from the company's European operations, which grew 88.6 percent in twelve months. With these strong returns, the company began to plan operations in other European countries, including Germany, Spain, and Italy. Viking also began to explore the feasibility of enlarging its European market by shipping goods across national borders. Despite its steady gains, Viking's Paris subsidiary had still not reached the break even point by July, 1993, and the company fired its French head of these operations. In September of that year, the French Viking unit finally began to turn a profit.

Further geographic expansion took place in October, 1993, when Viking commenced operations in Australia. The company opened a full-service distribution center in Sydney, and it began to ship orders in November. By the end of January, this operation was reporting revenues of $2.8 million, exceeding expectations. As Viking moved into the mid-1990s, the company's strong record of growth and profitability, driven by its stringent attention to customer service and its sophisticated catalog mailing operations, suggested that Viking would continue to thrive.